Half buff boost, more Bitcoin goes into sleep

The fourth halving of Bitcoin is approaching, which is an important milestone for investors and Bitcoin itself. In this issue, we will continue to delve into the significant supply constraints in the Bitcoin market and explain how we should measure the behavior patterns of investors before the fourth halving

The fourth halving of Bitcoin is approaching, which is an important milestone for investors and Bitcoin itself. In this issue, we will continue to delve into the significant supply constraints in the Bitcoin market and explain how we should measure the behavior patterns of investors before the fourth halving.

abstract

• The fourth halving of Bitcoin is imminent. As this moment approaches, the supply tension in the Bitcoin market has reached a historic high.
• We have extensively evaluated various indicators of Bitcoin's "available supply" in the market and the "supply holding ratio" of long-term investors. These indicators all exceed the new circulation by over 200%.
• By comparing the relationship between market value and realized market value, we estimate that the significant injection of capital into the Bitcoin market due to supply constraints will have a profound impact on the valuation of the entire Bitcoin market.

Dynamic Assessment of Bitcoin's Fourth Half Reduction in Supply in 2024

The halving of mining output is one of the most important milestones in the development of Bitcoin. It happens once every 210000 blocks are mined, and the subsequent output is halved. According to the operational logic of Bitcoin, the fourth halving should occur when the block height reaches 840000. However, due to certain probability factors affecting block generation and the limitations of natural changes in the block itself, the specific time for the fourth halving is still unknown.

Considering the current average block output speed, the most accurate estimate we can make is that the fourth halving should occur on April 23, 2024, with 158 days remaining until the current time.

Figure 1: Bitcoin is about 158 days away from the next halving

Given the high cost and operational expenses of mining, Bitcoin Miners need to use most of their gross income to pay for mining costs. So far, the value of newly mined Bitcoin by Miner has reached up to $1 billion per month throughout the entire 2023 fiscal year, and this high cost has a very significant deterrent effect on capital inflows into the Bitcoin market (as Miner tends to hold the Bitcoin they extract instead of selling it to the market at current prices).

After halving, this number will be reduced to $500 million per month, roughly equivalent to the $450 million monthly selling pressure near the FTX point a year ago.

Figure 2: Number of newly mined Bitcoins per month and their market value (in US dollars)

In addition to the fascinating technological charm demonstrated by halving Bitcoin, its profound impact on the market is also a point of interest to investors. In the previous one year cycle after halving, the market performance was impressive.

The reaction of the market to halving the special currency has aroused people's curiosity, whether halving is the main factor in initiating the price rise cycle, or whether it is just one of the many factors driving price increases. In this article, we will explore this issue from the perspectives of Bitcoin's market supply and investor behavior patterns, and hope to provide more circumstantial evidence for this issue from a chain perspective.

In this article, we divide our analysis of this issue into three different levels:

1. Assess the 'available and active' supply of Bitcoin in the market
2. Discussing the "Supply Storage and Savings Rate" of Bitcoin
3. Analyzing the impact of capital flows on the valuation of the special currency market

Figure 3: Market changes over a 365 day period after Bitcoin halving

Evaluation of the available supply of Bitcoin

Our first goal is to estimate the number of mobile, active, and freely circulating Bitcoins. In other words, what is the available supply that investors can reasonably expect to trade in the short term?

In the chart below, we can see several heuristic methods for Bitcoin supply considering "Bitcoin age" as the main parameter. These methods mainly calculate the time interval since the last time Bitcoin was traded on the chain. The supply from short held investors is currently 2.33 million Bitcoins, which is a historical low for many years. It should be pointed out that the "short supply of Bitcoin" in this statistical caliber refers to the longest Bitcoin traded within 155 days to date.

Another data describing these 'hot supplies' (i.e. recently spent Bitcoins as mentioned earlier) is the number of Bitcoins with an age of no more than one month - a total of 1.39 million Bitcoins. From this perspective, we can also consider those open futures contracts (totaling approximately 410000 Bitcoins) as part of the Bitcoin supply in the derivatives market.

In summary, this' hot supply 'is equivalent to 5% to 10% of the circulation supply involved in daily transactions.

Figure 4: Bitcoin's' Active Supply '

In order to study the supply of Bitcoin, we will mainly focus on the Bitcoin wallet. By considering the expenditure behavior of Bitcoin wallets, they are divided into "non current buckets", "current buckets", and "high current buckets" according to their expenditure. The latter two represent wallets that have both a large amount of income and expenditure behavior, and their approximate activity is shown in the figure below.

It is worth noting that these indicators have experienced consecutive years of decline since March 2020, mainly due to the impact of the special period and the resulting widespread social impact on the Bitcoin market.

Figure 5: Liquidity and non liquidity supply of Bitcoin

We can see a significant overlap between liquidity, high liquidity supply, and trading platform balances. This overlapping trend of continuous decline for many years is once again evident, indicating that Bitcoin is shifting from trading platform wallets to more illiquid wallets with almost no trading history.

Figure 6: Transaction balance of Bitcoin (overlapping chart)

One subtle difference we need to point out is the role of institutional level custodians and ETF type products such as GBTC (a useful reference tool for future spot ETF products). The following figure shows our best estimate of the total transaction volume on the Coinbase trading platform, CoinbaseCustomer, and GBTC cluster chain.

We should note that the turning point in the figure below occurred in March 2020, when there was a significant increase in market demand for GBTC and managed products, both of which are generally classified as illiquid supplies of Bitcoin.

Figure 7: Transactions between GBTC and Managed Products

If we compare the quantity of Bitcoin held by investors and the balance of trading platforms, we can see that their quantity is similar, approximately 2.3 million Bitcoins. These two "available supplies" together amount to 23.8% of the circulating supply, currently at the lowest level in history.

It can be said that the available supply of Bitcoin is relatively at a historical low.

Figure 8: Supply of Bitcoin short held investors and total balance of trading platforms

Analysis of savings and preservation supply

One thing we can confirm is that in the Bitcoin market, various indicators of 'available supply' are in a downward trend. In fact, this downward trend has been ongoing for several years, but since the large-scale sell-off caused by the collapse of 3AC and LUNA-UST in the market in June 2022, this trend has significantly accelerated.

Figure 9: Differences between the illiquid supply of Bitcoin and the supply of long-term investors

By contrast, when we observe the inverse indicators of "savings and preservation" by overlaying them, we can see a significant gap forming. Here, we focus on 'storage provisioning':

• Supply from long-term investors (Bitcoin supply with a "age" of 155 days or more, dark blue line)
• Non liquid supply (wallet with extremely limited expenditure history, light blue line)
• Treasury supply (ultra long held and lost Bitcoin supply, green line)

This difference is meaningful: it indicates that Bitcoin is shifting from trading platforms, speculators, and active trading to long-term investors' cold storage, managed products, and wallets.

Figure 10: Differences between the illiquid supply of Bitcoin and the supply of long-term investors

To understand the scale of Bitcoin supply in this part, we can compare the storage and savings rates of Bitcoin relative to the newly mined part. Currently, approximately 81000 Bitcoins are mined every quarter, and after halving, this number will be reduced to 40500.

Figure 11: Cyclic supply changes during the 90 day cycle of Bitcoin

If we use the superposition method to analyze the changes in illiquid supply over a 90 day cycle, we can see that Bitcoin's illiquid balance continues to rise in all previous halving events. This indicates that the number of buyer investors often increases significantly before and during the halving period, with a growth rate far exceeding the issuance rate of Bitcoin before and after halving.

The non liquid supply is currently growing at a rate of 180000 BTC per quarter, which is 2.2 times the issuance volume.

Figure 12: Comparison of non liquid supply and mining output in 90 day period

From the perspective of "investor holding time" as the entry point, we see similar accumulation patterns for long-term investors (blue) and treasury supply (green). Interestingly, this investor behavior seems to be divided into three waves:

1. The first wave of behavior occurs in the middle of a bear market, when prices significantly decline from historical highs
2. The second wave of behavior occurs in the later stages of a bear market, when the market has basically bottomed out
3. The third wave of behavior runs through the entire halving period, during which expected investors will buy heavily

Figure 13: Comparison of storage and mining output supplied by long-term investors

Overall, since February 2022, the cumulative rate of these users has exceeded the new issuance of Bitcoin. The duration of this period has set the longest record in history and is still constantly breaking this record over time.

Figure 14: Comparison between changes in account balances from "shrimp" to "fish" and Bitcoin issuance

In summary, the following figure shows the net balance changes of these various "storage" supply indicators since January 1, 2022. We used the change in circulation supply (orange) as a benchmark and found that investors' increase in holdings ranged from 1.1 times to nearly 2.5 times the new issuance volume.

Not only is our 'available supply' indicator at a historical low, but investors' 'supply storage' rate is also significantly higher than the issuance rate in the environment before the halving. The periodicity of the Bitcoin market cycle during bear markets and halving events can be described by these investor accumulation patterns, which reminds us of a saying in the market: bear markets create subsequent bull markets (and vice versa).

Figure 15: "Storage" supply situation under various indicators since January 1, 2022

Analysis of the Changes in the Capital Wave

In recent analysis reports, we have focused on the capital rotation in the entire digital asset ecosystem. In previous reports, we used realized market value as a representative parameter for capital inflows, outflows, and rotations.

From a behavioral perspective, long-term investors of Bitcoin tend to buy low and sell high, a profitable process that revalues Bitcoin's low-cost base to a higher cost base. For example, Bitcoin purchased for $6000 in 2018 can be sold for $60000 in 2021. For buyers, the purchase behavior in 2021 requires an additional 900% inflow of funds compared to before.

Another important conclusion is that although the current storage supply is increasing, another opposite situation will also occur. As shown in the following figure: After investors complete the trading behavior of buying low and selling high to obtain profits, their storage supply is reactivated and invested in the liquidity cycle.

Figure 16: Components of realized market value - realized profits

Under this framework, we are able to analyze the inflow/outflow of capital required to fluctuate the market value of Bitcoin for every dollar.

The last indicator we discussed today, the liquidity indicator, or volatility indicator, has also been mentioned in our recent analysis. It describes how much change in realized market value is required to cause a total market value change of 1 dollar in the Bitcoin market. We noticed some interesting details under this indicator:

• In the later stages of the bull market (orange area below), capital inflows exceeding $0.75 (usually over $1.0 in reality) are required to achieve a market value change of $1.0. Facts have proven that this is an unsustainable situation.
• During a bear market, with the loss of capital and investor attention, the price may fall between $0.10 and $0.30. This will lead to more drastic price fluctuations, as a small amount of capital inflows or outflows can have a huge impact.

The median of this indicator (red line in the figure below) has been close to $0.25 for a long time, indicating that the supply and liquidity of Bitcoin are quite tight - because most of the time, just $0.25 in capital inflows/outflows leads to a change in market value of $1.0. In many ways, this is consistent with the supply dynamics discussed above, where "available supply" is at a historical low, and the constantly rising storage rate will continue to lead to a decline in market liquidity.

Figure 17: Ratio of capital inflows and outflows to total market value fluctuations

summary

The fourth halving of Bitcoin is approaching, which is an important milestone in its fundamental, technical, and conceptual significance. Given the deeply ingrained return on investment in previous cycles, this will still be an area that inspires investors.

In this article, we used various indicators on the supply side to discuss the tension faced by the supply side of the Bitcoin market. There is significant consistency between these indicators, which proves that the "available supply" of the current market is still at a historical low, and the "supply storage rate" is far more than 2.4 times the current mining output of Bitcoin.